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Not as the main stream media will tell you. Just as the current national debt acts as the monetary base so does the trade deficit act as the world monetary base. Why can't the media produce one "pundit" to actually explain it? Is it really that difficult? Why is it when the US "catches a cold" the rest of the world goes deathly ill?
UPDATE: Bank Of China: Keen On Chinalco's Rio Deal - Xinhua (http://money.cnn.com/news/newsfeeds/articles/djf500/200903070315DOWJONESDJONLINE000010_FORTUNE5.htm - broken link)
EIJING -(Dow Jones)- Bank of China Ltd. (3988.HK) wants to take part in the financing of Aluminum Corp. of China's US$19.5 billion purchase of Rio Tinto PLC (RTP) assets, the official Xinhua News Agency reported late Friday, citing bank Chairman Xiao Gang.
So where will the money come from? This will be a transaction made in USD. The 19.5 billion was made possible by at the very least a 19.5 billion dollar trade deficit. Unless the US ran this trade deficit it would be impossible to function as a reserve currency. What this means is once again nothing can function without US debt. The US is the largest debtor in the world by necessity. Thats the price of having the worlds reserve currency.
So the question no CNBC pundit seems fit to answer is answered but it already was a long time ago. Its known as Triffin's Dilemma.
Triffin’s Dilemma, Reserve Currencies, and Gold (http://www.aier.org/research/commentaries/975-triffins-dilemma-reserve-currencies-and-gold - broken link)
Nearly 50 years ago, Yale University economist Robert Triffin identified the inevitable future deterioration of the dollar in his book, Gold and the Dollar Crisis: The Future of Convertibility (1960). Essentially, Triffin argued, under the Bretton Woods system in which the U.S. dollar was the world’s principal reserve currency (instead of gold, for example), the United States had to incur large trade deficits in order to provide the rest of the world with the liquidity required for functioning of the global trading system.
Whenever the US fails to run large trade deficits the world looses liquidity. Since US debt is money, to provide enough money in reserve currency transactions, the US must run continual trade deficits.
See a treasury secretary mention this lately?
Now the debate is, can we allow this to continue? That can't happen until we know what it is now and why.
does this mean that the rest of the world relies on the USA to ultimately be the end-all-be-all consumer, which without, there would absolutely be no point in any kind of mass production?
Not as the main stream media will tell you. Just as the current national debt acts as the monetary base so does the trade deficit act as the world monetary base. Why can't the media produce one "pundit" to actually explain it? Is it really that difficult? Why is it when the US "catches a cold" the rest of the world goes deathly ill?
UPDATE: Bank Of China: Keen On Chinalco's Rio Deal - Xinhua (http://money.cnn.com/news/newsfeeds/articles/djf500/200903070315DOWJONESDJONLINE000010_FORTUNE5.htm - broken link)
EIJING -(Dow Jones)- Bank of China Ltd. (3988.HK) wants to take part in the financing of Aluminum Corp. of China's US$19.5 billion purchase of Rio Tinto PLC (RTP) assets, the official Xinhua News Agency reported late Friday, citing bank Chairman Xiao Gang.
So where will the money come from? This will be a transaction made in USD. The 19.5 billion was made possible by at the very least a 19.5 billion dollar trade deficit. Unless the US ran this trade deficit it would be impossible to function as a reserve currency. What this means is once again nothing can function without US debt. The US is the largest debtor in the world by necessity. Thats the price of having the worlds reserve currency.
So the question no CNBC pundit seems fit to answer is answered but it already was a long time ago. Its known as Triffin's Dilemma.
Triffin’s Dilemma, Reserve Currencies, and Gold (http://www.aier.org/research/commentaries/975-triffins-dilemma-reserve-currencies-and-gold - broken link)
Nearly 50 years ago, Yale University economist Robert Triffin identified the inevitable future deterioration of the dollar in his book, Gold and the Dollar Crisis: The Future of Convertibility (1960). Essentially, Triffin argued, under the Bretton Woods system in which the U.S. dollar was the world’s principal reserve currency (instead of gold, for example), the United States had to incur large trade deficits in order to provide the rest of the world with the liquidity required for functioning of the global trading system.
Whenever the US fails to run large trade deficits the world looses liquidity. Since US debt is money, to provide enough money in reserve currency transactions, the US must run continual trade deficits.
See a treasury secretary mention this lately?
Now the debate is, can we allow this to continue? That can't happen until we know what it is now and why.
Of course not. This pozie scheme has destroyed the World Economy. The fractional banking system encourages rampant debt. The trade deficits have nothing to do with supplying world liquidity, it is simply a tool to consume more than you can actually afford to consume on money borrowed from foreigners. The result will be large pieces of the former USA being owned by foreign interests. The government will soon be the major shareholder in the major banks; they are already the owners of a huge chunk of the countries best real estate by the take over of Freddy and Fannie. At some point countries like China and Saudi Arabia who have been financing the government’s debt will demand payment and end up in possession of those assets. The country has been sold out by the greedy, and everyone just let it happen because they were stupid and lazy. In the real world if you do not have what it takes to keep your assets, someone will take them from you.
does this mean that the rest of the world relies on the USA to ultimately be the end-all-be-all consumer, which without, there would absolutely be no point in any kind of mass production?
Tell me if I got it right
Hi NJ Chutzpah,
Indirectly. In a most twisted fashion, it needs our debt just like we need govenment debt for money. Now let me explain with my usual island example.
Consider ten small groups on an island but one of the more trusted caught fish who was a missionary. The others build huts, chop fire wood etc in the rather small economy but they are each different small clans who have a history of confict.
Now consider the hut builders and the firewood producers had some issue in the past and did not trust each other as stated. The ones who provide fire wood would like the skills of the hut builders to repair their hut but the firewood producers do not have the firewood yet. If the hut builders do not trust the firewood producers no transaction can be made.
Now if the fisherman owed fish to the firewood producers this could resolve the problem. So to repair the hut the firewood producers could then offer the fish IOU. A debt currency is born.
Perhaps the other 9 communities had no trust but direct barter. How well would this economy run? Trade would be painful. Consider that in all other cases the fisherman missionary paid his debts and did not have this history. What if he had a couple of IOUs? We would begin to see some liquidity. A few transactions could be conducted in missionary IOUs. It would still be restricted however. So then the separate groups actually don't mind having the missionary take goods and just owe them fish. Now if there are 10 IOUs there is lots of liquidity because of the trust of the missionary.Now the goods are exchanged in transactions of missionary IOUs. The missionary has no need to fish for awhile. Now consider what would happen if this fishermen had the destructive virtue to pay his debts? The economy of the island would go into a dark age all because the missionary did not want to be in debt.
Horrifying isn't it?
In order for the world to have enough liquidity for transactions the US must run trade deficits simply because they need USDs to trade with each other. The consumption is just a side effect. The reason why the world is going down with us is the USD debt is the worlds money supply and leveraged positions are being paid down destroying the money supply.
Of course not. This pozie scheme has destroyed the World Economy. The fractional banking system encourages rampant debt. The trade deficits have nothing to do with supplying world liquidity, it is simply a tool to consume more than you can actually afford to consume on money borrowed from foreigners.
Hi jimhcom,
Actually its true. Any dollars leaving the US would have caused a depression unless more was created. However though people would rather transact in paper dollars the investment community would certainly get wind of this and gold would begin to rise against the fixed USD offshore. Gold was leaving the country. Europe was growing after WII.
If for example there was an island Z currency and an island X decided to trade in its currency and it was the same size it would cause a depression up to 1/2 of the money supply unless the money supply was expanded to double but this would debase it in total volume verse the fixed supply of gold. Its gold's achilles heal, it can't expand well. Thats why USD went off Brenton Woods. It also means to support the world economy as a reserve currency many more USDs will exist than actually represent the US economy. That is the scary problem. As a reserve currency the total volume of dollars should buy up more than the US economy can support.
This does not mean that evil men did not plan this or simply take opportunity, it just is what it is. In hindsight it is very easy to see it was used by evil men. That is not surprising since bankers usually are. I think they planned it all along.
Quote:
The result will be large pieces of the former USA being owned by foreign interests. The government will soon be the major shareholder in the major banks; they are already the owners of a huge chunk of the countries best real estate by the take over of Freddy and Fannie. At some point countries like China and Saudi Arabia who have been financing the government’s debt will demand payment and end up in possession of those assets. The country has been sold out by the greedy, and everyone just let it happen because they were stupid and lazy. In the real world if you do not have what it takes to keep your assets, someone will take them from you.
Actually if the US used its currency to buy productive capital the US would have owned the world. So it was not inevitable. From my observation this does not fit with the plan. I believe the cartel has gone internation for some time and was in reality based in London all along. They don't really care about nation states, they are an international finacial power of fuedal lords. Someday there will be a king.
well, in certain sense, you're right, but you seem to make a huge assumption by claiming "our trade deficit doesn't matter". Whoever provides the reserve currency might indeed have to run a large trade deficit, but that who doesn't have to be the US. Green buck wasn't the reserve currency before WWII, nor would it be reserve currency for ever. Crisis changes things, whenever US $ stops being the reserve currency or even just one of a few reserve currency, then the debt load incurred during the profligate would matter quite seriously. IMHO, the supremacy of pound was built upon Royal Navy controlling the world commerce and Britain controlling 1/4 the world; The supremacy of dollar was built upon all of the industrialized nations devastated by WWII, half the developed world shut themselves out of the capitalism system and the majority of world population didn't even live in a modern nation state. Now everything is different, the momentum built up by half a century of being the reserve currency can and will still carry the dollar for a while, but it will not last, nor will the world system based upon it, inevitable very painful readjustment will happen, this crisis may or may not be the one, but the one will happen, and everybody will be affected, probably quite negatively. The bottom line is not about who transfers how many manufacturing jobs to which country, the bottom line is China, Indian, Arab nations, South East Asian nations, Latin American nations, even African nations, are all part of the game now, unlike for for the past 400 years in which all game players are all member of the western civilization in broad sense. The system we had before and the system we have now are unsustainable because it's still fundamentally built around US and Europe largely competing with each other, economically, militarily, politically and strategically. Now it's not that case any more, even those "lazy sleazy" Arabs got the military tool (guerilla warfare and suicide bombing, hate it or love it, it gives the west some serious problems) that can burn the so called "best trained best equipped" military pretty badly, and the economic tool that can drive the whole west into recession overnight. The game has changed, and old west centered system won't last, and whenever it collapses down, it will hurt everybody, including non-western nations, but the fundamentally unbalanced world system simply won't last. That's my firm belief.
well, in certain sense, you're right, but you seem to make a huge assumption by claiming "our trade deficit doesn't matter". Whoever provides the reserve currency might indeed have to run a large trade deficit, but that who doesn't have to be the US. Green buck wasn't the reserve currency before WWII, nor would it be reserve currency for ever. Crisis changes things, whenever US $ stops being the reserve currency or even just one of a few reserve currency, then the debt load incurred during the profligate would matter quite seriously. IMHO, the supremacy of pound was built upon Royal Navy controlling the world commerce and Britain controlling 1/4 the world; The supremacy of dollar was built upon all of the industrialized nations devastated by WWII, half the developed world shut themselves out of the capitalism system and the majority of world population didn't even live in a modern nation state. Now everything is different, the momentum built up by half a century of being the reserve currency can and will still carry the dollar for a while, but it will not last, nor will the world system based upon it, inevitable very painful readjustment will happen, this crisis may or may not be the one, but the one will happen, and everybody will be affected, probably quite negatively. The bottom line is not about who transfers how many manufacturing jobs to which country, the bottom line is China, Indian, Arab nations, South East Asian nations, Latin American nations, even African nations, are all part of the game now, unlike for for the past 400 years in which all game players are all member of the western civilization in broad sense. The system we had before and the system we have now are unsustainable because it's still fundamentally built around US and Europe largely competing with each other, economically, militarily, politically and strategically. Now it's not that case any more, even those "lazy sleazy" Arabs got the military tool (guerilla warfare and suicide bombing, hate it or love it, it gives the west some serious problems) that can burn the so called "best trained best equipped" military pretty badly, and the economic tool that can drive the whole west into recession overnight. The game has changed, and old west centered system won't last, and whenever it collapses down, it will hurt everybody, including non-western nations, but the fundamentally unbalanced world system simply won't last. That's my firm belief.
Hi eatfastnoodle,
Again, thats why its a dilemma. I could have titled it, "Those of you who have studied the issue for 15 minutes and offer "common sense solutions" have no idea what you are talking about".
That kind of input does not matter. I am warning anyone who will listen that anyone who uses their intuitive understanding of basic economy is going to be completely and utterly fooled by what the bankers have waiting for them. They have made it their life work to grow wealthy on the sweat of others. If one does not learn the unintuitive system every good sense statement like "we have too much debt", or "greed" or "off shoring is the cause" or "we should pay down debt etc" is simply an utter waste of time. The system is rigged to do all those things.
We are the country everyone does their deals through right? Country A needs us to give Country B something so Country A can get something from Country B, but we only can give Country B our dollar bills
Instead of fish which is actually a usable product, we just have checks right?
The USA is just one big bank
Is this how the importing/exporting business came about?
Why is direct barter painful?
And also just because the missionary pays off its debt off doesnt mean the economy has to halt because the missionary will still need more firewood, and huts, and that means they will have to start trading some fish again
Quote:
Originally Posted by gwynedd1
Hi NJ Chutzpah,
Indirectly. In a most twisted fashion, it needs our debt just like we need govenment debt for money. Now let me explain with my usual island example.
Consider ten small groups on an island but one of the more trusted caught fish who was a missionary. The others build huts, chop fire wood etc in the rather small economy but they are each different small clans who have a history of confict.
Now consider the hut builders and the firewood producers had some issue in the past and did not trust each other as stated. The ones who provide fire wood would like the skills of the hut builders to repair their hut but the firewood producers do not have the firewood yet. If the hut builders do not trust the firewood producers no transaction can be made.
Now if the fisherman owed fish to the firewood producers this could resolve the problem. So to repair the hut the firewood producers could then offer the fish IOU. A debt currency is born.
Perhaps the other 9 communities had no trust but direct barter. How well would this economy run? Trade would be painful. Consider that in all other cases the fisherman missionary paid his debts and did not have this history. What if he had a couple of IOUs? We would begin to see some liquidity. A few transactions could be conducted in missionary IOUs. It would still be restricted however. So then the separate groups actually don't mind having the missionary take goods and just owe them fish. Now if there are 10 IOUs there is lots of liquidity because of the trust of the missionary.Now the goods are exchanged in transactions of missionary IOUs. The missionary has no need to fish for awhile. Now consider what would happen if this fishermen had the destructive virtue to pay his debts? The economy of the island would go into a dark age all because the missionary did not want to be in debt.
Horrifying isn't it?
In order for the world to have enough liquidity for transactions the US must run trade deficits simply because they need USDs to trade with each other. The consumption is just a side effect. The reason why the world is going down with us is the USD debt is the worlds money supply and leveraged positions are being paid down destroying the money supply.
We are the country everyone does their deals through right? Country A needs us to give Country B something so Country A can get something from Country B, but we only can give Country B our dollar bills
Hi NJ Chutzpah,
Yes, through our currency and especially oil. It also called petro dollars, dollar oil bourse etc. Here is an article on the oil transaction currency status of the dollar.
Contemporary warfare has traditionally involved underlying conflicts regarding economics and resources. Today these intertwined conflicts also involve international currencies, and thus increased complexity. Current geopolitical tensions between the United States and Iran extend beyond the publicly stated concerns regarding Iran’s nuclear intentions, and likely include a proposed Iranian “petroeuro” system for oil trade.
Similar to the Iraq war, military operations against Iran relate to the macroeconomics of ‘petrodollar recycling’ and the unpublicized but real challenge to U.S. dollar supremacy from the euro as an alternative oil transaction currency.
Quote:
Instead of fish which is actually a usable product, we just have checks right?
The USA is just one big bank
Yes and it saps other industry. Remember the missionary did not fish much anymore. Instead of requiring skilled labor to facilitate trade we don't need all these skilled people. Thus skilled workers are forced out of the market. The only thing that has saved us thus far is a business friendly climate so that new industry forms here first.
Quote:
Is this how the importing/exporting business came about?
International trade is quite old. WWII is what began this dynamic as the world's reserve currency.
And also just because the missionary pays off its debt off doesnt mean the economy has to halt because the missionary will still need more firewood, and huts, and that means they will have to start trading some fish again
Sure if there were enough fish to go around and that would have to be the currency until its replaced. Gold simply cannot work, there is never enough and it was monopolized. Both times this county tried it led to the 1870-1890 bust and the 1930s. No thanks. I am certainly open to ideas about money but I currently prefer simple full reserve currency backed by taxing power.
We need to imitate silver somehow. The Peruvian silver mines in the Americas provided plenty of liquidity to Europe at the right time.
actually, in your primitive island scenario, wouldnt fish be a good currency because fish is always needed since it is the food, and it replenishes itself, and the technology is not advanced enough to overfish, or farm them?
But we do not produce any oil really?
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